All Costs

In accounting, all costs are either fixed costs or variable costs. Variable costs are inventoriable costs. That means accountants allocate fixed costs to units of production. Then they are recorded in inventory accounts, such as cost of goods sold. Fixed costs, on the other hand, are all costs that are not inventoriable costs. All costs that do not fluctuate directly with productionvolume are fixed costs. Fixed costs include indirect costs and manufacturingoverhead costs.

Comparing Fixed Costs to Variable Costs

When comparing fixed costs to variable costs, or when trying to determine whether a cost is fixed or variable, simply ask whether or not the particular cost would change if the company stopped its production or primary business activities. If the company would continue to incur the cost, it is a fixed cost. If the company no longer incurs the cost, then it is most likely a variable cost.

Variable vs Fixed Costs Examples

To further help explain these costs, find a couple variable vs fixed costs examples below.

For example, if a telephone company charges a per-minute rate, then that would be a variable cost. A twenty minute phone call would cost more than a ten minute phone call. A good example of a fixed cost is rent. If a company rents a warehouse, it must pay rent for the warehouse whether it is full of inventory or completely vacant.

Variable vs Fixed Costs and Decision-Making

For example, if a manager is deciding between keeping production levels constant or increasing production, then the primary factors in this decision will be the variable or incremental costs of the production of additional units of output. It would not be the fixed costs related to the operations that cannot be altered and will not change with the level of production. Therefore, in most straightforward instances, fixed costs are not relevant for productiondecision, and incremental costs, or variable costs, are relevant for these decisions.

Very resourceful and understandable. But in a situation where output need to be increase and the current machines are operating at maximum level,Then the need for a new machine arise… What will the cost of incurring that machine be classified as ?

based on this info above, Interest expense is not an operating expense, so it is not a fixed cost, only a period cost, like an Income tax. However, you have classified interest expense as a fixed cost above.

Thank you for the post. I’m trying to figure out how to break down the price of a unit to be sold into the portions of the price that covers fixed, variable, and profit per unit. Would you happen to have a post or know of a resource that may be helpful?

‘In accounting, all costs are either fixed costs or variable costs. Variable costs are inventoriable costs. That means accountants allocate fixed costs to units of production. Then they are recorded in inventory accounts, such as cost of goods sold. Fixed costs, on the other hand, are all costs that are not inventoriable costs. All costs that do not fluctuate directly with production volume are fixed costs. Fixed costs include indirect costs and manufacturing overhead costs.”